Detroit Formulating Plan To Exit Longest Municipal Bankruptcy

Detroit has seized several tragic crowns in its descent into bankruptcy. Already the United States’ largest municipal bankruptcy, the long winding case is now the country’s longest running case. With an astounding $18 billion dollars of debt on its balance sheet, Detroit has many difficult choices ahead.

The bankruptcy case in Detroit has drawn plenty of attention due to its size and potential to set precedence. No city of this size has ever declared bankruptcy, and no level of municipal debt in default has ever approached this level. The decisions and outcomes of this case have the potential to set precedents for future cases.

Detroit’s adjustment plan likely to be presented this week

Attorneys representing the city of Detroit, in coordination with city emergency manager Keen Orr, will likely to present a “plan of adjustment” in the coming days. The details of this plan remain unknown, however, they could have massive impacts on the various parties the city of Detroit owes money to.

The final content of the adjustment plan remains unknown, though an early draft was leaked in January. According to this early draft, retirees, who are owed billions by the city, will be favored over bankers and bond holders. Under the early draft of the plan, Detroit would seek to reclassify secured debt owed to various banks as unsecured debt, which could then be wiped out in bankruptcy court.

Over the last few weeks, however, the city has been in negotiation with lenders, so the final content of the plan may have changed considerably. The final content of the plan should become clear this week, though it’s an entirely separate matter of whether or not the court will approve of the plan

Important crossroads being reached in case

Over the coming days, several important arguments will be heard and decisions potentially made in the bankruptcy case. First up will be a hearing for bondholder insurers to determine whether or not they are entitled to future liens on city tax revenue. The insurers had provided insurance for bondholders in case the city did not pay back its debt.

Who will be classified as secured debtors, which are debtors first in line for repayment, will also be considered this week. As of now, it looks like banks and bondholders are the most likely to be classified as unsecured debtors, while retirees will be given preference.

Ultimately, the fate of the Detroit and the many parties owed money by the city will be determined by judge Rhodes.